The company that became the poster child for so-called patent trolls and prompted calls for legislation to curb the practice reached an agreement with federal regulators to stop making phony legal threats against small businesses.

Under an agreement with the U.S. Federal Trade Commission announced today, MPHJ Technology Investments LLC will stop making deceptive claims. MPHJ, its sole owner Jay Mac Rust of Waco, Texas, and its law firm Farney Daniels had sent letters to thousands of small companies warning they face lawsuits unless they pay to license MPHJ patents, according to the FTC.

MPHJ had never actually sued a company until January, when the FTC and states said the licensing firm’s demand letters were empty threats designed to scare unwary businesses into forking over cash. The case marks the first time the FTC has used its consumer protection powers against a company whose sole business is to obtain patent royalties.

“Patents can promote innovation, but a patent is not a license to engage in deception,” Jessica Rich, director of the FTC’s Bureau of Consumer Protection, said in a statement. “Small businesses and other consumers have the right to expect truthful communications from those who market patent rights.”

MPHJ, which owns patents it claims cover scanning a document so it can be attached to e-mail, has been sued by state attorneys general under consumer protection laws. It’s often cited by companies such as Google Inc. (GOOG) and retailers that want Congress to take greater steps in limiting patent suits, especially against the users of common technology.

Apps Makers

Under the agreement, MPHJ retains “the right to enforce its patents by contacting companies suspected of infringement, and there is no restriction impairing MPHJ’s right to enforce its patents,” MPHJ said in an e-mailed statement. “The agreement includes MPHJ’s commitment that letters sent by the company and its counsel will continue to be accurate, and requires no material revisions to the company’s letters.”

Some of the groups pushing for legislation said the FTC agreement didn’t go far enough. The Consumer Electronics Association said funds should be returned to the businesses, while the Application Developers Alliance said companies like MPHJ are “economic parasites.”

“This settlement doesn’t even qualify as a slap on the wrist to a company that sent demand letters to thousands of businesses -- extorting money, threatening jobs, and stifling innovation,” Jon Potter, president of the apps group said in a statement.

16,000 Letters

MPHJ, through different subsidiaries, first sent letters to more than 16,000 business telling them they “likely have an infringing system” and offering to settle out of court for as much as $1,200 per employee, according to the FTC.

Later, a “draft lawsuit” was sent to 4,870 businesses under the Farney Daniels letterhead, warning that the suit would be filed within the next two weeks. The letters said that “many companies” had paid for a license even before a single person had paid, according to the FTC.

Vermont sued in May 2013 after letters were sent to businesses in the state, including two non-profit agencies that provide care to disabled people.

The Vermont case has been bogged down in a dispute over whether it will be heard in state or federal court. Minnesota reached an agreement with MPHJ in August that limited what it could say in demand letters. In Nebraska, a federal judge said in September that the state had failed to prove “objectively baseless” conduct by MPHJ and that the company had a constitutional right to enforce its patents.

MPHJ denied it did anything wrong and said it had fully intended to file suit except that its patents were being challenged at the U.S. Patent and Trademark Office.

There’s been a debate over whether it’s enough for Congress to strengthen consumer protection laws or if a provision should be part of a larger package of changes to patent law. Republican leaders in both the House and Senate judiciary committees have pledged to make the issue a top priority when the new Congress goes in session in January.